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Buying a Portland Business

Is Portland fertile ground for buying a business or it is all just small potatoes?

Photo Credit: JONTHAN HOUSE - Pour it on: Stumptown Coffee Roasters is rare exceptional lifestyle company that attracted private equity and grown beyond the city. Sam Holloway teaches entrepreneurship at the University of Portland and sees a recurring pattern in his students. They graduate, go work in industry and then...

“After 10 or 15 years they want to be their own boss and make their own hours, but don’t want to start from scratch. So they look for a business owner who wants to get out, and they buy a business in Portland. And it’s usually because they believe in the company values. They’re not out to make a killing.”

Holloway says this is the sort of merger and acquisition activity best suited to Portland.

“The deals that make it into the movies, the venture capital and private equity plays, they’re only 1 percent of the deals done in a year according to the Kauffman Foundation, an organization that supports economic independence through education and entrepreneurship. The M&A market in Portland is drying up, and that’s not a bad thing.”

The UP prof specializes in business model innovation and new venture strategy. He also writes a blog for craft brewing entrepreneurs, and sees craft brewing as the model industry — disruptive, yes, but done as much for love as for money and growth.

Much of what Holloway says is borne out by a recent report by BizBuySell.com, which bills itself as the Internet’s largest business for sale marketplace, with an inventory of approximately 45,000 businesses.

Photo Credit: JONATHAN HOUSE - Tasty: Daves Killer Bread expanded with outside investment, as did Stumptown, proof that small local companies with strong stories can catch the eye of the money men.Its second quarter 2014 Insight Report shows how the sales of small businesses in the Portland area compare with the rest of the country.

BizBuySell looked at the asking prices from the companies listed on the site. Some basic facts show that Portland is a small biz town:

n The current median asking price of businesses for sale in Portland is $205,000. A year ago it was $240,000.

n The median revenue of those companies sold on BizBuySell was $446,880, up from $411,522 in 2013.

n The median cash flow (money that comes out of the business over the course of a year) was $90,000 — exactly the same as last year.

Portland has more retail outlets for sale than the national average (38 percent vs. 31 percent) and fewer services (32 percent vs. 39 percent), which suggests good news down the line for all those food carts, coffee shops and boutiques.

And Portland does have strong listing growth (up 10 percent on the year) although that growth is coming in the retail area.

Although it should be pointed out that the marketplace itself skews to mainstreet — it’s where you might go to buy a shop, restaurant, gas station or dry cleaners.

Nationally, buying and selling activity is looking up. BizBuySell saw the most closed transactions this quarter across 70 major markets (2,029) since 2008 and the Great Recession.

“At the end of the day, you’re buying the cash flow of a business. In Portland the average cash flow multiple in the 18 that closed was 2.91, whereas nationally it was 2.2,” says Bob House, BizBuySell.

House says there is a latent supply

of businesses coming up for sale, post-recession.

“It’s a great time to be a buyer, we’re seeing low multiples in terms of what you can buy cash flow for.”

Holloway, the Assistant Professor of Strategy and Entrepreneurship at UP, says that things changed after the DotCom Bubble burst in 2001.

“Business model is the main lever of value creation now, not technology. And the types of business model that seem to be started in Portland are a lot like this data: small, family-owned, providing a nice lifestyle.”

He says these businesses are not scalable in the conventional sense, and private equity would not be interested. One exception was Stumptown Coffee Roasters.

“It’s a lifestyle business that had a wonderful following. And a private equity firm from the east coast said ‘Wow there’s a line around the block, it may not scale any more in Portland but we can scale it geographically, put one in New York and Los Angeles....’”

Holloway says we think of buying companies as Silicon Valley tech companies.

“They usually look for other people’s money, usually millions of dollars. And investors are comfortable with knowing what a tech company does and doesn’t do and place their bet accordingly.”

But Portland’s bakeries, breweries and restaurants don’t fit that.

“Sales are not high enough, revenue is not high enough, EBITDA is not good enough, so they don’t invest.”

He mentions Dave’s Killer Bread is one of the exceptions to that rule.

“It started with humble ambitions and private equity came in so it could scale.”

Another example is Ninkasi, the brewery from Eugene which has had many suitors, but the owners have declined to sell.

“It’s the fastest growing craft brewery in American history. They started as two guys who wanted to make great beer and help the Eugene community, and now they are in half the states in the US.”

Holloway believes these are the kind of stories that inspire Portlanders.

“Portland is a great place to find a small business you could turn into your lifestyle. People like to live here, work here, it’s a nice place to raise kids. Businesses that are being bought for $240,000 with a cash flow of $90,000, those are lifestyle businesses. And they’re critically important to Portland’s economy.”